Building and investing in startups is a challenging sport. Doing it well requires practice. What follows is a set of training data, sourced from the greatest minds in Silicon Valley, on what makes a successful startup.[^1] Whether you're a founder, operator, or investor, use it to coach yourself like an athlete. Evaluate a number of companies against these inputs and then do it again. When you learn to ask these questions, to know intuitively when each one should be asked – that's when the great opportunities emerge. <br> # Industry Study **Market Need meets Novel Tech:** - Timeless market need or old problem with deep existing demand (e.g., need for a place to stay while traveling, need to pay off debt, deep desire to own without the finances to do it, etc.), plus - A novel technology, concept, or form factor (e.g., new tech coming out of research labs), and - Faster, higher quality, lower friction, lower cost, etc. *As Ev Williams said: "We often think of the internet enables you to do new things, but people just want to do the same things they’ve always done. Give them exactly what they're looking for. The Internet makes human desires more easily attainable."* **Category Creation:** - Is this a new category that seriously hampers incumbents through business model or technology? Or is the space already “done”? - If no market exists, how does one compete against non-consumption and communicate the need for the product? **Market Size:** Is the TAM opportunity there? Look for: - TAM expansion - Credible adjacencies / proxy markets - Nascent market potential - Frequency of Use. What's the price x volume of the market? Does it match up with what management calculated? **Incumbents:** - How liked/hated are they by customers (1 hated – 5 loved)? - How innovative and tech-savvy are they (1 stagnant – 5 cutting-edge)? - How long has it been since a changing of the guard (1 recent – 5 long)? - Is this space one of their top 3 objectives (if so, don't compete with Google, etc.)? - What kinds of moves are the incumbents making and how they change the market? - How might a startup disrupt this market? **Competition:** - How fierce is the competition (1 zero-sum – 5 non-existent)? Is there a way to indirectly compete in order to save yourself from the bloodbath? - Is this space typically overlooked or undervalued by Silicon Valley? - Is there whitespace here? How crowded is the space (startups and VCs)? How concentrated is it? - Look at market comps and identify how competitive products address this opportunity. How (and how much) can a good company differentiate itself from a bad one in this industry? **Timing Curve:** - Where is the company on the wave (1 too early – 5 too late)? - Did they step on the gas hard and early? Is time to their advantage? - Is a failure of the past now possible (i.e. Webvan)? What has changed in the world that enables this business to exist/thrive now? **Pricing Power:** - Who controls industry pricing? - Does the company/sector have any pricing power? - What is the relative power of customers, suppliers, competitors, and regulators? **Secret:** - Is this opportunity a “secret” as Peter Thiel would describe it? - What is true about the market that no one else understands? - What discontinuity in the market can the company leverage to win a large share? **Gut Check:** - Is this a good business? - What are the key success factors to superior performance in this industry? - What drives outcomes? - If you could make 10 investments in your entire life, would this be one of them? Would you jump ship to build this company? **Clarity:** - Do you understand this business? - Do you know how the product looks and works? - Can you name the problem, the benefit, and the reason to believe? Test yourself by pitching it to a colleague or describing it to a ten-year-old. DO THIS! <br> # Company Study **10x Solution:** - Is the value proposition a painkiller or a vitamin? - Is the product 10x better than existing solutions? Is it 10x cheaper than existing solutions? *Truly great technology companies overcome the inertia of behavior change, and are the result of an inflection point in technology, allowing the founder to conceive a new kind of product by radically rethinking things.* - Does it democratize something complex, allowing non-experts to execute expert tasks (e.g. Uber empowers anyone to be a personal driver)? **Barriers to Entry:** - Does the company have a plan to win the market for 20 years? Through: - Brand, - Scale-cost advantages, - Network effects, - Proprietary technology - Or something else? - If there are network effects, do they: - A) Drive more user value, - B) Raise entry barriers, - C) Increase switching costs / exit barriers? - Is someone helping the company build a moat who effectively owns them? - Do they have proprietary power, i.e. an edge that gives them an unassailable advantage on their competitors, e.g., - Team (experts concentrated), - Intellectual property, - Scarce supply, - High switching costs, etc? - If one had access to unlimited capital, how effectively would they compete against this company? **Longevity/Antifragilty:** - Is this a great company? What could change this assessment? - Is it built to last? Is this company going to matter in 10 days, 10 weeks, or 10 years? How will this company weather a recession? *The business must be built to be durable and last a long time, because all companies are valued based on future expectations. The goal should always be to build a great business that can, and will, eventually trade publicly.* - Does this company get stronger with more chaos (i.e. antifragile)? - Why is the company good (or bad) at what they do? Can they sustain it? Is this company growing by acquisition? If so, how sustainable is that? **Go To Market:** Poor distribution, not product, is the number one cause of startup failure. - How big is the distribution problem? *If distribution is a hard nut to crack, then getting it right may create a terminal monopoly business (Intuit).* - Does one channel drive returns? **Traction:** - Where are they in [the Traction Gap](https://1p0dc61tan859681x151aldl-wpengine.netdna-ssl.com/wp-content/uploads/2019/01/Traction-Gap-Framework.pdf); what's their developmental stage? - How real is their traction? - Did they meet prvious projections? - How sticky is the product? - Can they achieve 50-100% growth rate year over year for several years? - What does their sales pipeline look like? - What's their NPS? - Is this a case of TNAC (traction, not a company)? **Invisible Asymptote:** - What's the invisible asymptote? *This is what ultimately limits TAM (e.g. shipping fees for Amazon). Removing asymptote after asymptote is the only way to sustain fast growth over the very long term. Understanding why a potential customer refused to purhase signals twoard an oncoming asymptote.* **Culture:** Culture is the superstructure through which people's energies are channeled. - Is there a strong culture? Is there a shared value set that sharply distinguishes them from the rest of the world? - Do they have a strong sense of identity that dovetails with the company's overall mission? Are they closer to a cult (without actually being one) than consultants? - Do they have a philosophy on compensation and how to hire/fire? - Is the culture composed of high trust, high quality people with high alignment, long term orientation, and a generative spirit? **Financing:** - What's management's projected use of proceeds? What does the roadmap look like and what are the key milestones? - What's the company's burn rate and projected runway? - Is the valuation appropriate? Are the terms fair? *Economics and control are important. Do your own financial projections and senstivity analyses with management's provided metrics and assumptions.* - Are pro rata rights secured? - Are incentives aligned? - Are there skeletons in the closet (e.g. fired co-founder, large debts, consultants owed shares, pending lawsuits)? - Is the corporate structure well-formed? Who's on the board of directors? **Risks:** - What are the key risks and how might they be rapidly eliminated? - Are there regulatory or legal issues? - Is there tech, business model, or team risk? <br> # Business Model Study **Economics:** - What are the economics of the base business unit? How do these economics stack up against competitors? - Is the CAC/LTV ratio more than 3x? What's the CAC payback period? - What's the churn (is it net negative)? - What's the ARPU and ARPE? - Sales efficiency? - Is there margin protection? **Revenue Model / Pricing Clarity:** - Does management have a clear revenue plan? Can you do the math? - Is revenue coming from one key source? - Is there potential for upsell or cross-sell? - Is the product/service properly priced? Is there flexibility to increase the price? Any price inelasticity? - Is the company trying to scrounge money from many different channels, indicating a lack of understanding and focus? **The Buyer:** - Who is the buyer, and who is the user? Are their incentives right? - What is the customer's ability to pay? - Does this replace an existing service that the customer already spends money on (e.g., taxis/car ownership > uber/lyft)? - Is there an opportunity to redirect dollars (e.g., lack of millennial car ownership = ability to pay for Uber)? - If the buyer is an enterprise, does purchasing the product help the decision-maker land a promotion? - Can you easily describe the sales process – from order to fulfillment? **Business Model Innovation:** - Is there an innovative business model? *Business model innovation is often more disruptive than technological innovation. Incumbents adapt to and adopt new technological changes (web to mobile) much more easily than they adapt to and adopt new business models (selling software to free ad-supported software).* **Gateway Drug**: - Does this company have a Type 1 mandate and a Type 2 vision? <br> # Management Study **Leader/Visionary:** - Is the founder magnetic? Do people follow them? - Are they strategic? Are they able to formulate a strategy and tactics to take advantage of market opportunity? - Can they adapt to new and incomplete information? - Do they hit targets that no one else can see? - Are they laser focused on their vision, without distraction? **Judgement:** - Has the founder been good at allocating capital? - Are they comfortable making quick and effective decisions in a minimal data environment? - Are they able to distill insight from large quantities of changing data and forecast the future with a high degree of accuracy? - Do they seek out experienced council, weigh the odds, and then make their own decisions? - Do they understand complex human dynamics? - Can they see the business from both 1 foot and 10,000 feet? **Character:** - Is the founder ethical, honest, and transparent? *One way to evaluate this is to ask situational questions and observe their answers/choices.* - Do their past actions cross-reference with their stated values? Are they in this for the right reasons? - Do they treat people well? - Do they follow through on what they say? - Do they take feedback well? - Are they courageous? - Are they confident, but not arrogant? - Do they have emotional triggers? - How do they respond when challenged? - Are they obsessed with learning? **Sales:** - Is the founder an exceptional communicator and relationship builder? - Are they an evangelist for the company, who, in addition to inspiring investors, inspires customers, employees, and influencers? - Do their engineers believe in them? *Engineers say a lot about the quality of the company and know when it's going well or not.* **Hiring:** Is management a world-class recruiter of talent? - Do high quality people trust and respect them, or want to work with them again? - Can they convince top executives to join, for a sizeable salary cut? - Can they find and hire undiscovered, yet olympic caliber talent? - Do they have a compelling story for why the 20th engineer should join instead of Google? - Do they fire fast and hire tightly (i.e., not let anyone into the company unless they're high-quality and needed)? **Drive:** - Is the founder driven? Where does the motivation come from? *There are many hurdles, challenges and pitfalls along the way to building a great company.* - Are they competitive, resourceful, and relentless? - Are they optimistic and high-energy? - Are they in it for the long term? - Are they a world-class executor? **Focus:** - Does the founder have a plan, and can they execute? - Are they bold in their strategic vision, but pragmatic in their execution? - Are they laser-focused on the right things? Are they able to focus resources without succumbing to distraction or chasing shiny objects? *The old adage that more companies die of indigestion than starvation is so true.* **History of Success:** - Does the founder have a history of personal exceptionalism? Look for a track record of success. - Have they broken out of the bounds of their peer group? Was it clear that they were special or destined for unique outcomes in life? - What is their background, and what do their former colleagues, investors, classmates, say about them? **Co-founder Dynamic:** - Are there 1-3 founders? And are they fully aligned? - Is there a clear delineation between responsibilities (i.e., there aren't two CEOs)? - Do they complement one another well? - Do they have a prehistory of working together? How well do they know each other? Is there trust and respect between them even when they're mad? - Is there a technical co-founder? *Teams with technical co-founders are more cash efficient since they tend to figure out their customers faster, and their products don't stall in a cash crunch because the founders can write code themselves.* **Red Flags:** - Some things to watch out for: inaccuracies in the books, extreme desperation, mania, refusal to carry DNO insurance, extreme hype, secrecy, few tangible results. - How are they compensated? - Are their interests aligned with shareholders? <br> [^1]: I originally built this tool for my own use, to keep me disciplined when making bets early in my venture career. It also included a quantitative layer, to score early-stage technology investment opportunities across 60 dimensions, but that is beyond the scope of this piece. %% ##### Scraps *Note: If you'd like to stress test your startup pitch before bringing it to VCs, I'd be happy to provide feedback. [Schedule a call here](https://calendar.app.google/rL5ZgkNm23N1fBmQ7).* that's when you start winning the game. become great at the game. capital allocator. Building and investing in startups is a challenging sport. Those who do it well will rise, but it requires practice. Have you ever wondered what goes on in a VC's mind when they're evaluating a startup? The answer: many things. Complex decisions are difficult to checklist. Tradeoffs are nuanced, and there is often no definitive answer. What follows is a set of inputs that, based on my research and extensive interviews, have trained the neural networks of the greatest investment minds in Silicon Valley. [1] It is my hope that this research will serve you -- whether you're a founder preparing for a pitch, or an aspiring investor yourself. Use it as a tool to train your own intuition. Evaluate a number of companies against these inputs and observe how it evolves your ability to both raise and allocate capital. And then modify it! This is simply a canvas upon which you are invited, and encouraged, to paint your own hard-earned wisdom. In the future, everyone will be a VC. So let's swap notes on how to do it well. ** Equity is the path to generational wealth, with upside increasingly locked in technology companies. But building and investing in startups is a challenging sport. Those who do it well will continue to rise, but it requires training. And the fastest approach is to copy the best. What follows is a set of training data, sourced from the greatest minds in Silicon Valley, on what makes a successful startup.[1] Use it to coach yourself like an athlete. Evaluate a number of companies against these inputs and do it again. Add your own insights and then do it once more. Continue training until you achieve your goals. Bon voyage! ** Have you ever wondered what goes on in a VC's mind when they're evaluating a startup? Over the past half a decade, I built an investment checklist sourced from the greatest minds in the business. I originally built it for my own use, to keep me disciplined when making bets early in my venture career.[1] But now my hope is that it will serve you -- whether you're a founder preparing for a pitch, or an aspiring investor yourself. *Note: Picking startups is extremely hard. There's no shortage of VCs who invest in consensus deals and chase brand names. This guide is not for them, nor sourced from them. Such an approach systematically misses great companies. This guide was sourced from VCs who invest rigorously and independently.* **Monopoly:** Do they have a plan to monopolize the market for 20 years (through brand, scale-cost advantages, network effects, proprietary technology or something else)? Can they expand that monopoly over time? Are they building a defensible moat (internal moat like product or external moat like regulatory)? Is someone helping build them moat who effectively owns them? Do they have proprietary power, i.e. an edge that gives them an unassailable advantage on their competitors (e.g. team (experts concentrated), intellectual property, scarce supply, high switching costs, network effects)? **Barriers to Entry:** Is there a competitive moat? Are there network effects that: A) Drive more user value, B) Raise entry barriers, C) Increase switching costs / exit barriers? Are there patents or protectable IP? If you had access to unlimited capital, how would you feel about your chances of successfully competing against this company? Note: Picking startups is extremely hard. There is no shortage of VCs who invest in consensus deals and chase brand names. But this approach systematically misses great companies. The VCs who develop the skill required to invest rigorously and independently avoid overpaying, and contribute to healtheir ecosystem/industry dynamics. This guide is for, and sourced from, this latter category. *This often requires an intimate knowledge of both the market and the customers’ pains, needs, and desires.* They're the decision-makers // you're pitching them? based on best practices in the industry. comes from the greatest minds in the business I've built an investment checklist based on interviews with I originally built it for my own use, to keep me disciplined when making bets. It also included a quantitative layer, to score early-stage technology investment opportunities across 60 dimensions, and help benchmark the opporunity cost of different investments. But that is beyond the scope of this essay. to serve as a point reference on the opportunity cost of different investments, but that is beyond the scope of this essay. sought out the best and asked them My hope is that this willl help you prepare insights into what Tier 1 VCs look for when investing. I wrote this guide to serve as a reference is meant to serve as a reference Picking startups for investment is extremely hard. Therefore, there is no shortage of VCs who invest in consensus deals and take credit when a couple of them hit. However, the industry It is my belief that we're moving into an area where everyone will become an investor. In the future, everyone will be a consumer, a producer, and an investor. And of course this is just a starting point. Modify it and evolve it It's about time we start teaching this skill. It is my hope that this serves as a tool to train your own intuition. Evaluate a number of companies against these inputs ability to raise or allocate capital grow. democratize access? This is simply a starting point, a canvas upon which you should paint your own hard-earned wisdom. successful Silicon Valley VCs. Please feel free to use this as a tool to train yourself You can use this as a tool to train yourself and nuanced tradeoffs that Add your own insights as you learn. and watch your skill compound. Your future self will thank you. ou'll be thanking yourself, trust me. observe how it evolves your ability to both raise and allocate capital. But it requires training your investment acumen like an athlete. But to do so, we must train our investing acumen like an algorithm. But like most things worth having, it requires a rigorous training process. Those that nail the question, "what makes a successful startup", will rise. But it requires training one's mind in the same way that an athlete trains their body. Investing is a challenging sport. The same way athletes train their bodies, investors train their minds. What follows is a set of training data, sourced from the greatest venture minds in Silicon Valley, on what makes a suucessful startup. Whether you're a founder preparing for a pitch, or an aspiring investor yourself, it is my hope that you will leverage this insight to achieve your goals. Equity is the path to generational wealth. Today, technology equity accounts for X% of global wealth creation. The founders and investors who captured this wealth answered one simple question: what makes a successful startup? Investing is a challenging sport. You must train yourself like an algorithm. In the future, everyone will be VC. So we might as well get good at it. This is my contribution train your own intution. it is my hope that you will leverage this insider knowledge to train your own neural net/intution. Read it today It is my hope that you will leverage this insight to train your own neural net The same way athletes hit the gym to train their bodies, so too, must we train our investment minds. - ![[P. 344. An Inside Look Into Stonks, the Democratization of Dealflow, and the Future of Startup Investing#^eooe9y]] - But the industry systematically misses great deals. If you can get good at identifying deals yourself, you can avoid overpaying and contribute to much healthier ecosystem dynamics. Developed a proprietary due diligence product using qualitative research (20+ interviews) and quantitative research (Crunchbase data) to score early-stage technology investment opportunities across 60 dimensions. - Keeps me disciplined when making bets - Gives me a point of reference to weight the opportunity cost of different investments - Scoring (to benchmark opportunities over time, maintain awareness of opportunity cost. like buffett said: if you could make 10 investments in your entire life, would this be one of them?) Is this one of the 20 investments I'd like to make in my lifetime? Would I jump ship to work here? Can you imagine holding stock in this company for twenty years? - Alt title: How VCs evaluate startups, How a VC is evaluating you, What goes on inside a VC's mind? An inside look into a VC's mind? What VCs look for in startups %%